China’s economy shows slowest growth since 2020

(CNN Business) –– China faces its economy’s worst quarterly performance in more than two years, after suffering months of strict confinements by covid-19 which has wreaked havoc across the country.

The gross domestic product (GDP) of the Monday The world’s largest economy grew just 0.4% in the three months to June 30, compared with the same period a year earlier, the National Bureau of Statistics (NBS) reported on Friday.

The figure represents a sharp decline from the 4.8% rise in China’s economy in the previous quarter, and is well below the 1% growth estimated by economists in a Reuters poll. On a quarterly basis, GDP contracted by 2.6%.

The worst performance of the Chinese economy since the outbreak in Wuhan

chinese economy

Barricades from recent COVID-19 related closures block the entrance leading to the Fengming Haishang residential development of Country Garden Holdings Co. in Shanghai, China on July 12, 2022. (Qilai Shen/Bloomberg

This is the weakest performance of the Chinese economy since the first quarter of 2020, when the country practically paralyzed all its activities in the fight to contain the first epidemic of coronavirus which started in the city of Wuhan. During this quarter, GDP contracted by 6.8%.

In the first half of this year, the economy grew by 2.5%. This is also well below the annual target of 5.5% set by the government. Indeed, Beijing admitted on Friday that it would be difficult to meet its GDP targets in 2022.

“There are various challenges to achieve our planned economic growth target for the full year,” Fu Linghui, spokesperson for the BES, said at a press conference in Beijing. However, he noted that he expects the economy to recover in the second half of 2022.

growing challenges

Policy makers in China are facing increasing challenges to maintain stable economic growth. Precisely, the country is experiencing a sharp slowdown in economic activity due to the strict zero covid-19 policy imposed by Beijing, which is added to an authoritarian regulation in the private sector and a real estate crisis which has led to an increase of the bad debts in bankyes growing social protests.

Since March, Beijing’s hardline stance to eradicate the virus has forced months of lockdown in dozens of cities across the country, including Shanghai, the nation’s financial and transportation hub. Millions of residents remained confined to their homes and shops, restaurants and factories were closed. What harmed the exercise consumers and disrupted supply chains.

The authorities began to reopen the economy early last month after restrictions were lifted in some key cities. Manufacturing and service industries showed signs of improves over the past few weeks. However, Beijing’s strong adherence to the goal of zero covid-19 has caused great uncertainty among businesses and shaken investor confidence. consumer spending stay weakwhile the labor market faces significant pressure: youth unemployment reached a new record high of 19.3% in June.

A “hard and unexpected blow”

At Friday’s press conference, Fu said the economy had been hit “seriously and unexpectedly” by internal and external factors.

The global increase in the prices of raw materials, in particular food and energy, inflation imported. And growing risks of stagflation across the world also threaten China’s economic stability, Fu warned.

The poor performance in the second quarter “reflects the large impacts of the omicron outbreak and corresponding stringent measures in major cities,” said Chaoping Zhu, Shanghai-based global market strategist for JP Morgan Asset Management.

“Looking ahead, we expect a continued economic recovery in the second half of this year, supported primarily by investment in Infrastructure led by the government,” he said. He also added that if the government eased Covid-19 restrictions further, consumer confidence could recover at a faster rate.

But the real estate sector may still pose a downside risk to growth, Zhu noted.

Larry Hu, chief economist for China at Macquarie Group, explained that recent data shows that China’s GDP growth needs to accelerate to more than 7% in the second half of 2022 to generate 5% annual growth on the whole year.

“This is impossible without a significant increase in stimulus policies from the current level,” he concluded.

Some good news on the Chinese economy

Now, there was some good news in Chinese economic data on Friday.

The mining and manufacturing industry grew by 0.9% compared to the second quarter of last year. And retail sales in June rose 3.1% from a year ago, boosted by an increase in auto sales due to pent-up demand and political support for electric vehicles. Industrial production also picked up in June, up 3.9% from a year ago.

Real estate investment is collapsing

For its part, the vast real estate sector remains a major burden.

Property investment plunged 9.4% in June from a year earlier, after falling 7.8% in May, according to Macquarie Capital calculations based on government data. Square foot property sales fell 18% last month, following a 32% decline in May.

“The decline in sales means developers are facing a liquidity crunch,” Hu said.

“The property problem is at the root of growing social instability, as evidenced by the recent mortgage boycott,” he added.

Desperate homebuyers have refused to pay mortgages on unfinished homes in dozens of cities in recent days. The boycott comes as a growing number of projects have been delayed or stalled due to a cash crunch that caused development giant Evergrande to default on debt last year and several other companies to hedge against creditors.

Zhu of JP Morgan Asset Management said the growing number of unfinished homes poses a significant risk to the financial health of banks.

“Decisive and effective regulatory action must be taken to prevent the mortgage boycott from becoming a systemic risk,” he insisted.

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